Blackstone Inc. (BX) Earnings Call Transcript & Summary

All right. Good afternoon, everyone, and welcome back to the BofA Securities Future of Financials Virtual Conference. I'm Mike Carrier. I'm the research analyst at BofA that covers the brokers, asset managers and exchanges. And I hope everyone is doing well. For our keynote lunch session, it's my pleasure today to introduce Jonathan Gray, President and COO of Blackstone. Prior to Jon's current role, Jon was the Global Head of Real Estate, which he helped build into the largest real estate platform in the world. Given Jon's perspective across the firm and Blackstone's investment platform across different asset classes, geographies and economies, it should be very insightful. And I'm looking forward to the conversation. Jon, thanks for being with us today.

It's great to be here, Mike. Thanks for having me.

[Operator Instructions]

So Jon, just to kick it off. Given your unique perspective across different markets and economies, I wanted to start with one big kind of bigger-picture question. We're seeing quite a bit of divergence between what's going on in the public markets versus the private markets and with valuations and particularly when you contrast that to the real economy even as we near vaccines. I just wanted to get your perspective on does it make sense. Are there areas for concern given that divergence?

I think it mostly makes sense, Mike. There are some areas for concern. But overall, I think there are a variety of factors driving this. The first one is, as you know, the stock market doesn't reflect exactly the composition of the GDP of an economy. So restaurants and retail and hotels represent close to 30% of private sector employment. But in the S&P, they're 7% or 8%. So that's one of the reasons you see this divergence. The second thing is there are some sectors of the economy that have really benefited from COVID, obviously the virtual world, Amazon, Zoom, Netflix. And so that's part of the reason those sectors have done quite well. Consumer finance has done well. Housing, in particular, with the decline in rates, increased savings levels. And then necessity-based businesses have done well. So that's part of the reason you've seen strength in the market. And then I think it's really important to remember that taking interest rates to 0 means the present value of cash flows is greater, particularly for growth companies and that's what you're seeing. So those are the combination of factors driving the market. I would say that there are some accesses. Businesses that tend to trade on sales as opposed to earnings are more vulnerable. Some of them will turn out well. Others may not turn out so well. So there are pockets of some access. But overall, I would describe the valuation construct is full but not necessarily excessive.

Okay. Great. And then just looking at the progress that we've made in terms of some of the vaccines and some of the progress around COVID. It seems like on one hand, it's very positive and it makes you feel a little bit better about the outlook. On the other hand, it feels like this has been dragging on longer than I think a lot of people probably expected, if we go back to last March. And so how has that been impacting some of the private companies? Is it -- and is that starting to create more investment opportunities?

Well, we really do have this tale of 2 cities, right? The virtual world I talked about has benefited. And the physical world, travel, hotels, entertainment, energy, retail, all those areas have been badly impacted. And if you own companies, and we have some businesses in those areas, fortunately, it's not a huge percentage. You're holding on to get to the other side. The news on the vaccine yesterday was encouraging, although, of course, it'll take time for them to roll out. But we know that we'll get to the other side. Even back in 1918, we got through a pretty tough pandemic. Now with our modern medicine, it should be faster. So the real question is what's the endpoint? What's the pace? Yesterday's news was encouraging. In terms of investment opportunities, what I'd say is the stuff in the assets in the most impacted areas comes out more slowly. If you're an owner of a hotel or an aerospace company, you're not necessarily enthused about transacting today. Your focus is more on raising capital to get to the other side. And so we bought some public stocks in REITs and MLPs. We've done some rescue financings around entertainment assets. But there hasn't been a huge volume of sales in the most impacted areas, which is consistent with what we saw in '08, '09. It will come but it takes a bit of time. Where the deal activity has been has actually been in those stronger sectors. And there, we've been doing a lot thematically and in fact, announced at the end of the third quarter that we had our biggest pipeline of deals ever. We had $19 billion of equity committed in things like Ancestry.com and the recapitalization of BioMed, our life science office company. So I'd say deal activity has picked up but the most impacted areas are still a bit slower.

Okay. Great. And then you guys have invested in various backdrops if you look over the history of Blackstone. And just curious, when you see the amount of like fiscal and monetary stimulus to try to combat COVID and how that kind of shifts the outlook for whether it's interest rates, inflation, like taxes, how do you think that outlook, whether it impacts how Blackstone invests or with your LPs, their decisions on how they're allocating capital?

Well, I think the megatrend here is really important to keep in mind and it is this very low interest rate environment. And I think it's analogous to what we've seen in technology, right? We were seeing the growth of e-commerce. And then -- for 10 years. And then we've seen the step function up as we got these events and we were all sheltering in place. I think there are some similarities with interest rates. We've seen this push down in rates and now this last step function here in the last 6 months. And if you're an institution and you need to deliver 7% to your beneficiaries, it makes it very hard. And so we're seeing more and more capital push into alternatives. We raised $90 billion over the last 12 months, even though for the most part we weren't in anyone's offices. It speaks to the desire. And the performance of alternatives speaks to our firm. And when we talk to these CIOs, which I do on a daily basis, they say what you'd expect, which is a 60-40 model with 40% of fixed income and a bunch of that in government bonds, all you're getting is return of capital and not return on capital. And they need to generate returns. And so this trend -- and we're really thinking thematically as a firm as we deploy capital. Alternatives are a powerful thing. And we are the primary beneficiary as the largest player. So that's one area. I would say on rates, I think it's likely based on what the European, Japanese and U.S. central banks have said that rates will stay longer and that central banks will focus more on employment levels than they will on necessarily inflation. They've said they'll tolerate negative real rates. So that makes you -- that gives you the strong impression rates will stay low at least for the next few years. At some point, we may see a higher -- long rates. But I don't think that's in the near term; it doesn't feel like. As it relates to taxes specifically, I think -- given the political environment, I don't think in the U.S., we'll see anything that dramatic. But you could see at the state and local level some increases in taxes because they're less likely to get big stimulus from the federal government. And that could put some pressure in those areas. But overall, I think for us as investors, thinking about these low rates, it has a powerful impact. And I think it's something we're all digesting. And clearly, the alternative firms are benefiting from it.

Right. That makes sense. And then maybe just one more like on the big-picture front. We recently went through an election. And I know it's extremely early. But when you look at some of the policies that Biden has out there, whether it's tax, regulatory, anything that you think on the positive or the negative side for Blackstone or the sector?

There's often a lot of focus on our firm and other alternative firms around government outcomes. What we say is we've been at this for 35 years. We've been in all red environments, all blue environments, divided government. And the one thing that's been a constant is we've delivered good returns for our investors, which is the essence of what we do and we've grown our business. And I don't expect the next 2 or 4 years to be any different than the past for us. Specifically, it looks as if we're likely to have something that's divided. It's not certain yet. There's a Georgia runoff still to come. I do think, though, you will see maybe some increased regulatory focus in certain areas. And then you also could see some areas that benefit, like infrastructure, like renewables, both areas where we have a large footprint. So I don't expect dramatic changes overall just given the split nature of government. But regardless of what comes, we feel good that we'll be able to navigate that.

Okay. And then just shifting over to -- more specific to Blackstone. I think one of the things that has been interesting watching Blackstone over a period of time is just the level of innovation. When I think about -- you've got your big businesses. But whether it's core, insurance, infrastructure, life sciences, growth impact, you name it, I mean you guys have been extremely innovative. So when I think about those platforms, where do those sit today from like a maturity standpoint, say, relative to private equity or real estate? And how much growth potential is there?

So I'd start with the idea that growing is sort of built into our DNA, hardwired into our DNA. And it really starts with Steve Schwarzman, who always has this idea that there's more we can do to serve our clients and that there are different verticals, adjacencies, different geographies and that we'll be better as a firm because if we grow, then our young people will have new opportunities. Many of our businesses are run by folks who are at different parts of the firm and evolved. If we grow, we'll serve our customers in more ways and they'll appreciate that. And if we grow, we'll have more intellectual capital that makes us better at our jobs. And I'll just use this as an example. Life sciences is a business that we bought a small firm a couple of years ago. It was managing a $900 million fund. We renamed it. Terrific team of scientists, doctors, investors. Blackstone Life Sciences is now the name. We helped them raise a fund within 12 months that was more than 5x larger than their previous fund. It came here, integrated with the firm in a lot of important ways. And look, as an example, we bought a business -- invested in a company called Alnylam, which is a cutting-edge RNA technology, life science company, doing some great things around heart disease, in particular. We gave the company $2 billion and we did that through the form of royalties. We did it in the form of a loan from our credit group. We happen to be the real estate owner of this company, life science real estate. We did a partnership with them on some other promising therapies. And that happened because we had this life sciences business but it helped other parts of the firm as well. So the short answer is I think we'll continue to grow. New areas that you pointed out like life sciences, like growth equity, infrastructure, insurance, all of those are in early days. And then some of the bigger businesses, core+ real estate, we think even though they've grown a lot, have enormous potential. We started core+ real estate 5.5, maybe 6 years ago. It's now $55 billion of assets under management. It's growing very quickly. BREIT, our private REITs embedded in there, which started 3 years ago, is now a $20 billion product. And our ability to add incremental products without adding, of course, enormous incremental overhead is a real difference maker and it helps our business. And of course, the margins and the fee-related earnings change in the business are all showing up. So I would say the combination of the trend, the power of our brand, which I think people don't fully appreciate in terms of attracting new capital to new strategies, the power of the brand to attract great people, the culture we have, all of that, I think, points us in a good direction. And I would expect from us, we'll continue to innovate and grow the business.

Okay. And then one follow-up on that. I think if we would have gone back, say, 5 years and you look at all the new like platform, your strategies that you had, I don't think anyone would have come up with all those different like asset classes or opportunities. So when you think about that innovative kind of DNA that's at Blackstone, is there still a lot more potential or -- I mean have you found a lot of areas and now it's just like scaling those out and building those?

I think there's still plenty of opportunity. I mean we did this BioMed transaction, which will likely lead to a new life science, open-ended, long duration fund of scale. We're doing some very interesting things in secondaries around different opportunities as managers look to raise capital to do things in the continuation space. In credit, I think there's a lot we can do. In the retail channel, serving customers given how difficult it is to get yield out there. In the hedge fund space, we're doing a bunch of bespoke products around equity capital markets, sovereign lending. We sit around -- we've been successful in Asia private equity. We'll raise new fund there, core private equity. I would say that there's not really -- we don't think there's a limit. And then a bunch of the existing fact -- areas can grow as well. So we're not sitting around saying there's no more white space. I think the opportunity is both in new sectors but then growing existing businesses. Infrastructure is a great example, core+ real estate. I think they can grow a lot. So for us, it's really about making sure that whatever we go into, we have great people. We feel like we have a competitive edge. And we can deliver for the customers because the most important thing is maintaining the confidence of our customers by delivering for them.

Okay. Great. And then just shifting to private equity specifically during COVID. I just wanted to get some insight on, one, is how has the portfolio been performing. Both areas that have been seeing some tailwinds but also some headwinds. And then as we do come out of this, say, you get a vaccine, how do you expect some of those headwind areas to start to perform?

So we do have some areas that have been negatively impacted. They would be things like theme parks. We have some meetings, businesses, businesses that service the meeting space, some energy exposure. Fortunately, it's not a huge percentage of what we've got. And most of that, we do think will recover. I mean do I think we'll go back to theme parks, take our children to do that? I think people will do that. Do I think we'll have meetings again? There'll be a BAML conference. It may be simulcast. But I'm hoping next year, Mike, we could do this in person. I think a lot of those businesses come back over time. And the key is to have the capital. One of the great things about our structure is we can hold assets through a storm and get to the other side. We've got real staying power. So in that regard, we've taken some markdowns in those areas. I'm hopeful and fairly confident they'll come back. The majority of what we own has been really well positioned. And a lot of that has been the decision we've made the last few years to go longer into some of these strong thematic areas. So if you look at our private equity portfolio, our biggest exposures are in companies like Refinitiv in the data analytics space; Ultimate Kronos, which is a SaaS-based software company that does human capital management; our investment in Bumble, the online dating business. We had a large investment in a renewables business, Vivint Solar, now Sunrun. So the portfolio has been really well positioned. And you can see that in the results. In both Q2 and Q3, we had double-digit appreciation. So I'd say, overall, we feel very good about the way we position private equity. I would add also Asia for us has been a big area. India, in particular, our results there have been incredibly strong. That's a real growth area for our private equity business and the firm overall. So I feel pretty darn good about where our portfolio is positioned. And obviously, if we get a vaccine and it's able to be distributed, that'll help some of the most impacted areas. And again, I think the thing that has made private equity work has made Blackstone work, and you could see it going back to 9/11, '08, '09, is because of the structure. We're not forced to sell. We have reserves in our fund. We ride through a storm. We can come out the other side. This was the classic story with Hilton worldwide, where we made $14 billion for our investors. We're set up for environments like this. And fortunately, I think we had a really good position going into this particular storm.

Right. That's good color. And one other area within the private equity portfolio, like technology has impacted a lot of sectors, whether it's public or private markets. So how has Blackstone like shifted? Just how they think about investing in the current portfolio of companies just given so much change happening in a lot of sectors due to technology?

Yes. I think as investors, being thematic is the best way to do it. And you tend to be more proactive and you have a clear view. You can build a management team and have real conviction. And today, I think you have more conviction and more thematic opportunities around some of these faster-growing sectors that are benefiting from the enormous transformation that's going on. So that's the movement of goods, from physical retail to e-commerce, which you can play in digital payments. You can play it in last-mile logistics. It's the content explosion that's happening as we go directly from movies and TV shows and video games and music from the producers directly to our mobile devices. We've done that in a lot of ways. A good example, we have a video game online advertising business that's been doing quite well. Digital infrastructure, fiber, data centers, towers, another area where we've deployed a lot of capital around the globe. It's got real tailwinds. And the migration to the cloud would be another area. Life sciences, which I mentioned we've been so active in, is getting a huge boost. And then green energy. And it's not just in private equity. I mean in green energy, for example, we've really pushed in our credit area, doing a bunch of recent deals in the renewable space. So if you can identify some of these big themes, mostly technology driven, then you can sort of play them directly or also one derivative across. You may not be able to buy a content company in Hollywood but you can buy their studios. Some of these themes are not necessarily technology oriented. So alternatives, which we play through the leveraged loan market, through buying stakes in alternative managers, through our secondaries business, which has a real tailwind, rising middle class in China and India, global travel, one of those that's been interrupted but we think will come back. But I would just say overall, as a firm, the push to be thematic, to be forward leaning is really powerful. And I think it's helped each of our businesses.

Great. That's good color. And maybe shifting to real estate. There's been a lot of uncertainty out there on how COVID kind of impacts the outlook. You guys have been vocal on sort of the areas that you've invested in. A lot of those have actually been on the right side of some of the trends. But when you think about coming out of this in some of the areas that have been harder hit and how those eventually play out and then some of the areas that have been structurally benefiting, like how do you see that playing out over the next several years?

So I think a lot of the trends we've been seeing will continue. Some will reverse in real estate. So as you mentioned, we've been very large players in logistics. 36% of everything we own in real estate that's approaching $100 billion gross value, including the debt, is in warehouses. We just announced a large deal in China today. It's in pretty much every major country in the world. I think that's going to continue because I think we'll keep seeing goods move online, direct to consumers. And last-mile logistics, in particular, will benefit. I would say residential housing has been another strong area around the world. Again, coming out of '08, '09, we built a lot less housing than we had done in previous decades. We made a big call on that on rental housing, in garden apartments in the U.S. and also in places like Berlin and Tokyo, which are all doing fine despite the crisis. What's been impacted there have been urban apartments in places like New York and San Francisco. I think that will reverse itself as people move back. But in the near term, there are obviously headwinds. In the office space, again, our biggest exposure is life science office. We're a huge owner of IT parks in India, which have held up quite well. Owned a bunch of things in Germany, again, have done well. U.S. traditional office in places like New York and Washington and Chicago have been tougher, smaller piece of what we have. But I think the next couple of years, with higher-vacancy companies being a little more hesitant to bring everybody back, at least in the near term there'll be some pain. But ultimately, I think there'll be a recovery. The last 2 categories I'd touch on would be hotels. We have about 7% of our portfolio in hotels. That's obviously been a badly impacted area although leisure hotels are coming back. I think business transient hotels, individual travelers will come back. Group will take a while. But we think travel comes back. It's a global phenomenon. It's not coming to an end. I was joking with my wife that for her 50th birthday, we were supposed to go to Italy. We ended up going to Vermont. Vermont is a lovely place. But we would love to be on planes traveling. I know most of the people here would as well. So I think travel comes back. I think retail faces the most secular headwinds. We don't own any enclosed malls in the U.S. What we do own in retail is mostly in Asia. We own some grocery-anchored convenience retail in the U.S. but there are more challenges in that space. It's about 5% of our total portfolio just because of the switch we've been talking about. I think the biggest thing, though, to remember about real estate, because I know public market investors are quite negative on the space, is back to that comment on low rates. If rates stay down at these levels, then cap rates for real estate will decline, meaning multiples will expand particularly for real estate that has strong fundamentals. And we're beginning to see this re-rating process. I think it will continue. And for our firm, with big exposure to real estate, this is quite positive.

Great. That was a good overview across the different spaces. Just one follow-up there just in terms of deployment activity in real estate. So do you have enough like visibility in some of those areas that have been hard hit? And do you feel like you do have that 3-, 5-year, 10-year time horizon? I mean do they start to make sense? Or is it still kind of sticking to some of those core thematic areas that you've been successful in?

So I think it's a combination. I think it's sort of those themes we really like. We stick with those. It's getting harder because they're going to price that in. So for now, we're sticking with those themes. And we continue to employ in those areas, garden apartments in the U.S., logistics around the world. But I do think, Mike, to your question, some of the hard hit sectors, hotels and office buildings, in particular, will offer some opportunity. The challenge has been what's the recovery curve. I think yesterday's news can give you a little more confidence -- or maybe a lot more confidence that we're going to have a functional vaccine. Now the question is because of the cold storage delivery, your need of that, in that particular case you need 2 doses, how quickly can it be produced. I think 2021 is still challenging in a number of these businesses in the physical world. But I think you could start to underwrite a recovery. And then the question is do you have sellers of assets who are prepared to pay -- let you pay a price that reflects several years of recovery before you get back to normalcy. I think we'll begin to see that. I think there will be financial pressure. As I said, it takes time but yes, we definitely will invest in some of the more dislocated areas. We did it back in March, when we bought a bunch of REIT stocks. We bought a bunch more recently during the trade down over the last month or so. And I think it'll come to the private markets but it just takes a little more time.

Right. Okay. Just shifting over to the credit business. There's been strong growth, whether it's at Blackstone and across the industry and particularly in this interest rate environment. There's also some concern that there's maybe like too much kind of growth in parts of the market. But Blackstone, so you guys have been around through many cycles. You've seen a lot. And so when you think about some of those risks versus some of the structural growth that you're seeing, like how do you see that playing out going forward?

I still see it as a sector with a lot of opportunity. The reason is -- look, we manage $140 billion in our credit division. It's still a tiny drop in the bucket given the overall sort of bond market and bank lending market, which is trillions of dollars. So we're tiny in the scheme of things, I believe. And I think the ability to be a solution provider in scale is very helpful to deal with complexity. I just think -- and the desire of our customers who are willing to trade a bit of liquidity for higher returns, I think that'll continue. So my gut is in as alternatives and the private equity business grows, the real estate business, the infrastructure business grow, I think that'll create more and more opportunity for us. So I think this will continue to be an area that will move more increasingly to the private market. Still a small percentage of overall lending market but it creates more opportunity. I think the spread premiums are real. Now it's possible as -- because of yield pressure, that comes down a bit. But as long as your overall expectations for return are reasonable, I think private credit can continue to deliver a meaningful premium over liquid-traded credit. And so I think that creates long-term opportunity.

Okay. Great. And then an area that we probably spend less time on with Blackstone but you guys have been very successful over time is the BAAM solutions part of the business. And it does seem like when you look at where valuations are in the public markets, it does seem like those types of strategies, it seems like should be in more demand, I mean like going forward. But just wanted to get your sense on that business with clients. Are you seeing more interest just given that things have been, at least on the public side, so positive?

Well, the hedge fund space has obviously had some headwinds. Performance of long/short managers has been more challenged. Some of the quant strategies are not producing the same kind of outperformance they did in the past. Our team has done an excellent job. First, we've done a great job protecting capital. This year, they're basically back to breakeven for our clients despite the volatility in Q1, despite the fact -- their hedges really make a difference the way they position the portfolio in a noncorrelated way. And they prove the value of this. I would also say that I think long term, in an environment where you can get very little from fixed income, I think noncorrelated, downside-protected liquid exposure in our BAM business has a lot of value. So we're hopeful that, that will attract more and more client assets over time. And I'd also say that the business has grown revenue despite the challenging environment as we move to some new areas and do things on a more direct basis. And I would expect that trend to continue. So that's been an area that hasn't grown as quickly. We're hopeful we can find some ways to get it growing more like the rest of the firm over time.

Okay. And then just shifting to the distribution side of the equation. When you look at Blackstone, you guys have relationships with many of the institutions and the LPs. When you think about the growth opportunity going forward partially given the expanding strategies that you're offering, but then when you look at the low-rate backdrop and allocation trends, where are we in sort of that opportunity for alternatives and for a firm like Blackstone from a growth perspective?